Valeo: Bank of America sees Valeo’s profitability take off and upgrades the stock to buy

(BFM Bourse) – The American establishment raised its recommendation on the automotive equipment manufacturer to buy this Thursday, estimating that its financial results will begin to align with its commercial successes.

If there is one sector that has lost its luster in recent years on the stock market, it is automotive equipment manufacturers. The various groups have been weighed down by the pandemic, inflation of raw materials and labor costs, geopolitical tensions and the “stop and go” of production at their customers, the manufacturers.

More recently, investors have feared that OEMs will face competition from Chinese rivals and that their margins will suffer from automakers’ race to electrify. As recently as June, Jefferies warned that “it’s likely to get worse before it gets better.”

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A few months later, Bank of America is taking a much more constructive stance. “OEMs have faced significant challenges in recent years and are not immune to disruption. However, stocks have already suffered a significant depreciation and are trading at depressed, OEM-like valuations,” it argues.

“The main difference, however, is that the results (of the equipment manufacturers, editor’s note) are closer to the bottom of the wave, while the manufacturers are entering a downward cycle (from a peak),” it judges. “Warnings on the results are still possible for the third quarter (at the equipment manufacturers, editor’s note), because the short-term destocking plays a role, but for 2025, we see the margins of the suppliers increasing,” considers the bank.

Quality of results destined to improve

More optimistic for the sector, therefore, Bank of America has raised its recommendation on one of the largest equipment manufacturers on the Paris Stock Exchange, namely Valeo. The establishment has gone from “neutral” to “buy” with a price target raised to 14 euros from 12 euros.

On the Paris Stock Exchange, the Valeo share price was driven by this change in recommendation, with the stock rising 5.3% to 9.084 euros at the start of the afternoon.

“Valeo has lost nearly 70% of its value since the pre-Covid period, which roughly corresponds to the decline in its earnings per share (…) However, we believe that results are improving and that it is time to become more positive,” judges Bank of America.

The company believes the company’s financial performance will begin to align with its commercial success. It cites the company’s robust growth prospects in ADAS (advanced driver assistance systems), lighting and electric powertrains.

For the bank, the quality of Valeo’s results is, moreover, ready to improve because R&D expenses should start to decline, the group is resorting less to accounting adjustments (such as the capitalization of R&D) and the negative impacts of the semiconductor crisis are fading. In addition, the establishment estimates that the new contracts that will be executed in 2025 display more favorable commercial clauses, with prices more linked to volumes.

As a result, Bank of America expects the company’s operating margin to improve in 2025 and 2026, with rates of 5.4% and 6.1% respectively, after 4.4% in 2024.

Given this trajectory, Valeo is currently trading at an attractive price, the bank considers, with a discount of 30% compared to its historical valuation ratios.

Julien Marion – ©2024 BFM Bourse